Sept. 4 marked the silver anniversary of Google and its parent, Alphabet (GOOGL 0.40%) (GOOG 0.39%). The company was founded 25 years ago this month, ushering in a paradigm shift in the world of internet search. In a blog post last week, CEO Sundar Pichai marveled at the technological advances that transpired over the past quarter of a century.
Pichai also suggested that recent advances in artificial intelligence (AI) are just the beginning of a vast technological wave to come, adding, “Over time, AI will be the biggest technological shift we see in our lifetimes. It’s bigger than the shift from desktop computing to mobile, and it may be bigger than the internet itself.”
While that might sound like hyperbole, there are already signs that a massive shift is underway. Investors looking to profit from this monumental shift should consider these five companies well-positioned to capitalize on the AI revolution.
Let the chips fall where they may
Nvidia (NVDA -0.86%) is something of the poster child for the rapid adoption of AI. Its graphics processing units (GPUs) supply the massive computational horsepower necessary to train and run these AI models, and they are the undisputed gold standard.
The company turned heads when it issued a stunning forecast that management attributed to accelerating demand for the processors used for AI. For its fiscal 2024 second quarter (which ended July 31), Nvidia forecast revenue of roughly $11 billion, up 64% year over year. Even that ended up being conservative, as revenue of $13.5 billion soared 101% year over year, while adjusted earnings per share of $2.70 surged 429%.
Management expects strong demand to continue. For the upcoming third quarter, Nvidia is guiding for record revenue of $16 billion, an increase of 170% year over year. That’s partially the result of easy comps caused by last year’s downturn, but the impact of AI is undeniable.
Nvidia’s dominance is fueling those gains. The company controls as much as 95% of the market for GPUs used to power machine learning, according to data compiled by New Street Research.
Bears will no doubt point to Nvidia’s lofty valuation, as the stock is currently selling for 41 times forward earnings estimates and 14 times next year’s sales. However, even conservative estimates suggest that AI could be worth trillions of dollars — and Nvidia is the gatekeeper on the toll road to AI technology.
I’ve looked at clouds from both sides now
While Nvidia will make its fortune developing and selling the processors used for AI, there are other paths to profit. The key to developing useful generative AI solutions is the large language models (LLMs) that unpin the technology.
These AI systems require a massive amount of data and are extremely expensive to develop. So it shouldn’t be surprising that Amazon (AMZN 3.52%), Alphabet, and Microsoft (MSFT 1.10%) are well positioned to ride this wave higher.
These tech giants not only have the necessary resources but have already developed the LLMs necessary to provide cutting-edge generative AI solutions. Furthermore, as the three leading cloud infrastructure providers, they are also in the best position to offer the resulting AI services to their cloud computing customers. In fact, Amazon Web Services (AWS), Google Cloud, and Microsoft Azure combined control 65% of the cloud infrastructure market, according to market analyst Canalys.
Needham analyst Laura Martin addressed additional advantages in a recent note to clients. “Not only do [Microsoft, Amazon, and Google’s] LLMs have the lowest cost structures and first-mover advantages, but their average lifetime value per cloud customer is about to skyrocket, owing to the stickiness of apps built on their LLMs,” Martin wrote.
Microsoft has an additional advantage. The company has already released its Microsoft 365 Copilot, a suite of AI-powered enhancements for its cloud software customers. These offerings could add $14 billion in annual revenue to Microsoft’s sales, even if only 10% of Office users adopt them, according to data compiled by Macquarie Equity Research.
Driving additional profits
Another company with a unique path to profiting from AI is Tesla (TSLA 10.09%). When it comes to the underlying information necessary to power next-generation algorithms, it’s hard to match the electric vehicle maker’s data horde.
While estimates vary, Ark Investment Management concluded that Tesla has roughly 2.7 million cars on the road collecting data today. While the subject is a matter of contentious debate, Ark believes “high-quality domain-specific AI training data could result in [a] winner-takes-most outcome” in the field of autonomous driving.
Tesla’s cache of proprietary data will result in better AI models, which will help develop better products, thus attracting more customers — and the cycle repeats.
To be clear, it could still be some time until self-driving solutions are ready for prime time. In the meantime, Tesla’s large and growing treasure trove of data will help the company reduce costs, identify new market opportunities, and improve its vehicles — even if fully autonomous driving is still years or even decades away.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon.com, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.